Barriers to Retail Competition and Prices: Evidence from Spain

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:Why do prices in Spain's regions fail to converge? The prime suspects for this puzzling result are differences in regional barriers to entry in retail distribution. This paper develops a Cournot-Nash model of imperfect competition to illustrate the effect of barriers on prices. A unique data set-derived from an extensive analysis of competition policies in Spain- provides evidence that barriers to entry increase regional prices. The evidence also suggests that, consistent with the model's predictions, barriers to entry raise prices up to a point, and thus indicate that barriers have a threshold effect on prices.